Top 5 U.S. Office Markets are on West and East Coasts According to Ten-X Study

Major costal metros are listed among strongest markets in Ten-X Research’s long-term forecast through 2019

IRVINE & SILICON VALLEY – Feb. 24, 2016 – Ten-X (formerly Auction.com), the nation’s leading online real estate marketplace, today released its latest Office Market Outlook report which highlights the sector’s top buy and sell markets. The long-term forecast report reveals San Francisco, San Jose, California, Orange County, California, New York City and Boston as markets investors may want to zero in on due to hot economies and positive employment growth. Meanwhile, investors may consider selling in Northern Virginia, Houston, Dallas, Pittsburgh and Long Island, New York, because of slowing rent gains and employment cutbacks stemming from slowing local economies.

“On a national basis, office development remains relatively low, yet still high enough to match the current level of demand,” said Ten-X Chief Economist Peter Muoio. “While many office markets suffer from a lack of demand and little or no development, others remain hot with strong demand, low vacancies and rising rents, all of which equal new construction.”

While Ten-X’s latest Office Market Outlook Report focuses on the markets investors need to pay special attention to, it also reveals how deal volume stabilized around $36 billion through the first three quarters of 2015 and how effective rents are up by 3.5 percent from a year ago — even approaching a pre-recession peak. Cap rates in Q3 2015 (flat from the prior quarter at 6.8 percent) are also discussed, as is the nationwide employment outlook and how that affects the office sector.

2015-2019 U.S. Office Projections:

Top 5 Buy Markets

2015 Rents (per square foot)

2019 Rents (per square foot)

2015 Vacancies (percentage)

2019 Vacancies

(percentage)

San Francisco

$41.33

$47.77

10.8%

12%

San Jose, California

$29

$33.72

17.4%

18.4%

New York City

$55.67

$66.06

9.1%

10.1%

Orange County, California

$22.81

$26.11

16.4%

16.3%

Boston

$33.82

$37.44

12.9%

1.8%

Top 5 Sell Markets

2015 Rents

(per unit)

2019 Rents (per square foot)

2015 Vacancies

(percentage)

2019 Vacancies

(percentage)

Northern Virginia

$27.26

$27.81

18.3%

20.8%

Houston

$23.33

$23.13

16.7%

20.1%

Dallas

$17.33

$17.55

22.2%

24.9%

Pittsburgh

$18.16

$18.58

16.2%

16.6%

Long Island, New York

$22.35

$23.34

13.9%

14%

2015 Rents

(per unit)

2019 Rents (per square foot)

2015 Vacancies

(percentage)

2019 Vacancies

(percentage)

U.S.

$24.97

$27.45

16.5%

17%

The Office Sector’s Top Five Buy Markets*:

San Francisco

Rents are up and vacancies are down in San Francisco thanks to a scorching local economy that has surpassed its 1990s tech bubble peak to a new record high (recently at greater than 4.5-percent year-over-year growth). Professional/business sectors there keep posting excellent employment gains and seasonally adjusted unemployment continues to trend well below the national average (recently measuring in the low 3-percent range). Despite a strong supply pipeline through 2018, San Francisco should see robust demand lowering availability further, pulling vacancy rates to the low 9-percent range by 2018.

San Jose, California

The region’s high concentration of tech/information sector talent is driving economic growth as overall employment’s post-recession rise is up more than 14.5 percent from its prior cyclical peak (with year-over-year gains topping 4 percent). Despite the large amount of completions slated for the next few years, demand is projected to outpace supply additions and bring vacancies to the low 15-percent range at their lowest point in 2018. The combination of rent growth and vacancy declines will result in healthy average annual NOI growth of 5.8 percent through 2019.

New York City

NYC’s office sector benefits from consistent employment gains. Payrolls are up more than 2 percent year-over-year and are projected to grow at a similar rate annually through 2019. Unemployment has crept below the national average while job gains in the professional/business services and financial services sector have been middling. The city’s hot tech sector is contributing to strong office demand. Effective rent growth is expected to average about 4.5 percent annually through 2019 as absorption outpaces completions through 2018.

Orange County, California

OC enjoys peak employment and healthy growth in key sectors, driving strong demand for office space, which will drive the metro’s rents up and vacancy rates down. Metro employment here is at a new all-time high, up nearly 3 percent from a year ago. Education/health services and leisure/hospitality sectors are the primary contributors to economic growth, while unemployment has fallen to the low-4-percent range — a significant improvement from one year ago. Vacancies, at 16.6 percent in Q3, will dip as low as the high 14-percent range.

Boston

Boston’s economy continues making forward progress, which is strengthening fundamentals and propelling NOI gains. Total unemployment has taken off post-recession to an all-time peak (about 2 percent higher than a year ago). Drivers of economic growth include the professional/business and education/healthcare sectors and metro unemployment most recently measured in the low-4-percent range. Effective rent growth is accelerating and NOI is projected to grow at a robust average annual rate of 4.7 percent.

The Office Sector’s Top Five Sell Markets*:

Northern Virginia

Indicators of low NOI growth on the horizon include slowing rent gains and weakening demographics. The region’s employment is heavily dependent on government and defense contracts and is up 2.4 percent from a year ago — with annual growth of 1.6 percent projected through 2018. Vacancy rates are swelling with little help on the horizon; vacancies should creep up to 20.8 percent by the end of 2019 and this will dampen rent increases.

Houston

Houston is struggling with persistent low oil prices and resulting energy sector cutbacks and consolidation. Unemployment here has bloated since the oil glut, up 40 bps from a year ago and just below the national average. Population continues to grow — by 2.5 percent in 2014 — well above the national average, but economic struggles could translate to weaker domestic in-migration going forward. Expect NOI to shrink annually by 0.7 percent through 2019 as vacancies rise and rents weaken.

Dallas

A statewide energy sector cooldown is hurting Dallas’s outlook. Employment is up a strong 3.5 percent year-over-year, but average annual growth is projected to decelerate gradually into the low-2-percent range by the end of 2019. Unemployment is creeping up, though still below the national average and the metro’s vacancies should remain stagnant in the mid-23-percent range through 2018 as supply meets diminished demand. Effective rent growth will see an average of just 1 percent annual growth through 2019.

Pittsburgh

The economic and demographic outlook here is bleak. Payrolls are up 1.2 percent from a year ago, aided by the opening of several hotels in 2015 but unemployment is in the low 5-percent range through 2015 and is now above the U.S. average for the first time since 2006. Pittsburgh’s office vacancy rate is back up to 16 percent from negative absorption and looks to remain around this level over the next several years. This is resulting in anemic rent gains, limiting market NOI growth.

Long Island, New York

The economy here is constrained by weakening demographics and middling employment gains. The office market is characterized by high availability and low demand. Vacancies climbed north of 14 percent despite an empty supply pipeline and should remain between 13 percent and 14 percent through the end of 2019. NOI growth looks to average just 1.3 percent annually through 2019 and demand will be tepid enough to keep rent growth depressed to an annual average of 1.2 percent through 2019.

*Data source for Top Buy/Sell Markets: REIS, Ten-X Research forecasts.

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About Ten-X

Ten-X (formerly Auction.com) is the nation’s leading online real estate marketplace, having sold 200,000+ residential and commercial properties totaling more than $37 billion since 2007. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions entirely online.

Ten-X empowers consumers, investors and real estate brokers with unprecedented levels of flexibility, control and simplicity – and the convenience of buying and selling properties whenever they want and from wherever they are. As real estate continues to move online, Ten-X is uniquely positioned to be at the forefront of this dramatic behavioral shift.

Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include Google Capital and Stone Point Capital. For more information, visit Ten-X.com.